2016 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

COMMUNITY BANKING INITIATIVE

Community banks provide traditional, relationship-based banking services in their local communities. As defined in recent FDIC research, community banks made up almost 93 percent of all FDIC-insured institutions at mid-year 2016. While they hold just 13 percent of banking industry assets, community banks are of critical importance to the U.S. economy and local communities across the nation. Community banks hold 43 percent of the industry’s small loans to farms and businesses, making them the lifeline to entrepreneurs and small enterprises of all types. They also hold the majority of bank deposits in U.S. rural counties and micropolitan counties with populations up to 50,000. In fact, as of June 2016, community banks held more than 75 percent of deposits in more than 1,200 U.S. counties. In more than 600 of these counties, the only banking offices available to consumers were those operated by community banks.

The FDIC is the primary federal supervisor for the majority of community banks, in addition to being the insurer of deposits held by all U.S. banks and thrifts. Accordingly, the FDIC has a particular responsibility for the safety and soundness of community banks, as well as a particular interest in and a commitment to the role they play in the banking system and the challenges and opportunities they face. In 2012, the FDIC launched a Community Banking Initiative focused on publishing new research on issues of importance to community banks and providing resources that will be useful to their efforts to manage risks, enhance the expertise of their staff, and better understand changes in the regulatory environment.

Community Banking Research

The FDIC continues to pursue an agenda of research and outreach focused on community banking issues. Since the 2012 publication of the FDIC Community Banking Study, FDIC researchers have published 10 additional studies on topics ranging from small business financing to the factors that have driven industry consolidation over the past 30 years. The Community Bank Performance section of the FDIC Quarterly Banking Profile (QBP), first introduced in 2014, continues to provide a detailed statistical picture of the community banking sector that can be accessed by analysts, other regulators, and bankers themselves. The most recent report shows that net income at community banks continued to grow at a healthy annual rate through the first three quarters of 2016, while total loans and leases at these institutions grew at a rate that was 2.9 percentage points higher than the rate for noncommunity banks.

Community Banking Conference

FDIC Chairman Martin J. Gruenberg gave the opening and closing remarks at the Community Banking Conference in April 2016.
In April 2016, the FDIC hosted a community banking conference entitled “Strategies for Long-Term Success.” About 250 community bankers and industry participants took part in a daylong discussion about what the future holds for community banks in the United States. In addition to addresses by FDIC Chairman Martin J. Gruenberg and Vice Chairman Thomas M. Hoenig, the conference featured four expert panels that covered, in turn, the community banking model, regulatory developments, managing technology challenges, and ownership structure and succession planning.

De Novo Banks

The FDIC is committed to working with, and providing support to, any group with interest in starting a community bank. In his remarks at the Community Banking Conference, FDIC Chairman Gruenberg discussed the FDIC’s efforts to facilitate the formation of de novo banks. The FDIC has:

Designated professional staff in each regional office to serve as subject matter experts for deposit insurance applications. These individuals are points of contact to FDIC staff, other banking agencies, industry professionals, and prospective organizing groups. These specialists serve as an important industry resource to address the FDIC’s processes, generally, and to respond to specific questions.

Reduced from seven years to three years the period of enhanced supervisory monitoring of newly insured depository institutions. The FDIC had established the seven-year period during the financial crisis in response to the disproportionate number of newly insured institutions that were experiencing difficulties or failing. In the current environment, and in light of strengthened, forward-looking supervision, the FDIC determined it was appropriate to return to the three-year period.

As an outgrowth from the conference, the FDIC expanded on existing initiatives to facilitate the formation of de novos and undertook two new initiatives to support the long-term success of community banks.

During the fall, the FDIC held de novo outreach meetings in San Francisco, New York, and Atlanta to ensure that interested parties and industry participants are well informed about the FDIC’s application process and the tools and resources available to assist organizing groups. Each of the outreach meetings addressed FDIC requirements for new bank applications, and highlighted strategies for successful formation. Based on a recommendation from the FDIC’s Advisory Committee on Community Banking, the FDIC incorporated into each outreach meeting a roundtable discussion with Chief Executive Officers (CEOs) of successful de novo institutions. These CEO discussions were a highlight of each outreach meeting, as the CEOs provided the attendees with practical advice based on their personal experiences. Similar outreach meetings will be held in the remaining three regions during 2017.

In December 2016, the FDIC issued for public comment a publication entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions that is intended to help organizers become familiar with the deposit insurance application process and describe the path to obtaining deposit insurance. The handbook incorporates information on topics raised during the de novo outreach meetings, including advice from the CEO panels.

Continuing Community Banking Initiative Activities

To learn more about how educators and bankers can partner in developing the next generation of bankers, the FDIC hosted a roundtable discussion with more than a dozen institutions of higher education and other industry representatives. The roundtable explored community banking educational programs and discussed challenges and best practices of these programs with the goal of exploring strategies for the industry’s long-term success.

Community Bank Advisory Committee

The FDIC’s Advisory Committee on Community Banking is an ongoing forum for discussing current issues and receiving valuable feedback from the industry. The committee, which met three times during 2016, is composed of 13 community bank CEOs from around the country. It is a valuable resource for input on a wide variety of topics, including examination policies and procedures, capital and other supervisory issues, credit and lending practices, deposit insurance assessments and coverage, and regulatory compliance issues. To learn more about how community banks could attract the next generation of customers, the FDIC conducted a panel discussion with millennial FDIC employees at the July 2016 meeting. The employees discussed how community banks can successfully address millennial preferences.

Community Bank Resource Kit

At the April 2016 Community Banking Conference, FDIC Chief Economist Richard Brown (second from left) summarizes findings of a recent FDIC study. In preparation for the Community Banking Conference, the FDIC developed a Community Bank Resource Kit for distribution to the conference attendees. The Resource Kit contains: a copy of the FDIC’s Pocket Guide for Directors ; Supervisory Insights articles related to corporate governance, interest-rate risk, and cybersecurity; two cybersecurity brochures that banks may reprint and share with their customers to enhance cybersecurity savvy; a copy of the FDIC’s Cyber Challenge exercise; and several pamphlets that provide information about the FDIC resources available to bank management and board members. The Community Bank Resource Kit was subsequently distributed to all FDIC-supervised institutions.

Technical Assistance Program

As part of the Community Banking Initiative, the FDIC continued to provide an extensive technical assistance program for bank directors, officers, and employees to improve communication generally and provide technical training on a range of topics. The technical assistance program includes Directors’ College events held across the country, industry teleconferences, and a video program.

In 2016, the FDIC hosted Directors’ College events in each of its six regions. These events were typically conducted jointly with state trade associations and addressed issues such as corporate governance, regulatory capital, community banking, concentrations management, consumer protection, the Bank Secrecy Act, and interest-rate risk, among others.

In addition, the FDIC hosted 12 industry teleconferences or webinars on a range of topics of interest to community bankers, including cybersecurity, overdraft protection rules, mobile financial services, commercial real estate, and the Real Estate Settlement Procedures Act. In addition, the FDIC offered 11 deposit insurance coverage seminars for bank officers and employees in 2016. These free seminars, which were offered nationwide, particularly benefited smaller institutions that have limited training resources. The FDIC also released three deposit insurance seminar training videos on the FDIC’s website and YouTube channel.

The FDIC offers a series of banker events, intended to maintain open lines of communication to keep bank management and staff up-to-date on important banking regulatory and emerging issues in the compliance and consumer protection area. In 2016, the FDIC offered three interagency webinars focused on the following topics: requirements and best practices regarding bank overdraft programs; interagency Community Reinvestment Act questions and answers; and Military Lending Act regulations.

The FDIC released six videos as part of its Technical Assistance Video Program, which offers in-depth technical training for bank directors, officers, and employees to view at their convenience. Updated videos were published relating to interest-rate risk (two videos), corporate governance, the ability-to-repay/qualified mortgages rule, and flood insurance. During 2016, the FDIC released a new video on outsourcing technology services.

Economic Growth and Regulatory Paperwork Reduction Act

During 2016, the FDIC, along with the other federal banking agencies and the FFIEC, continued a cooperative, three-year effort to review all of their regulations. The purpose of the regulatory review, which is mandated no less frequently than once every 10 years by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), is to identify and eliminate, as appropriate, outdated or otherwise unnecessary regulatory requirements that are imposed on insured depository institutions.

To facilitate the review, the agencies categorized their regulations into 12 separate groups. Over the course of two years, the groups of regulations were published for comment, through a series of Federal Register notices, providing industry participants, consumer and community groups, and other interested parties an opportunity to respond and identify regulatory requirements they believe are no longer needed or should be modified. The agencies also held six public outreach meetings across the country to provide an opportunity for individual bankers, consumer and community group representatives, and other interested persons to present their views directly to agency senior management and staff of the FFIEC and the federal banking agencies on any of the regulations subject to EGRPRA review.

The agencies received 234 comment letters directly in response to the Federal Register notices and also received a number of additional oral and written comments from panelists and the public at the outreach meetings. The agencies have reviewed these comments and comments received during outreach meetings and will summarize the significant issues raised and the relative merits of such issues in a report that will be issued through the FFIEC to Congress.

In addition, due in part to feedback received during the EGRPRA review, the FDIC and the other FFIEC member entities are undertaking a community bank Call Report burden-reduction initiative. The objective of this initiative, which comprises actions in five areas, is to streamline and simplify regulatory reporting requirements for community banks.

As an initial step, the banking agencies, under the auspices of the FFIEC, published proposed Call Report revisions in September 2015. The agencies began implementing these revisions, which include a limited set of burden-reducing changes, in the third quarter of 2016.

As a second action, the banking agencies accelerated the start of a statutorily mandated review of the existing Call Report data items, which otherwise would have commenced in 2017. In support of this review, users of Call Report data at the FFIEC member entities are participating in a series of nine surveys of groups of Call Report schedules conducted over the 19-month period from mid-July 2015 until early February 2017. Users participating in these surveys have been asked to explain fully the need for each Call Report item they deem essential.

A third action for the FFIEC members is to understand better, through industry dialogue, the aspects of community banks’ Call Report preparation processes that are significant sources of reporting burden. This outreach effort included on-site visits to nine community banks during the third quarter of 2015. In the first quarter of 2016, two bank trade groups organized conference call meetings with small groups of community bankers in which representatives from the FFIEC members participated. During these bank visits and conference call meetings, the bankers explained how they prepare their Call Reports, identified which schedules or data items take a significant amount of time or manual processes to complete, and described the reasons for this.

Fourth, building on the outcomes of the preceding two actions, the FFIEC and its member entities developed a separate, shorter, and more streamlined Call Report to be completed by eligible small institutions, as well as certain burden-reducing revisions to two other existing versions of the Call Report. The banking agencies, under the auspices of the FFIEC, published the proposal on August 15, 2016, with a proposed effective date of March 31, 2017. After considering the comments received, the FDIC and the other FFIEC members made certain modifications to the proposal. The FFIEC notified institutions about the outcome of the proposal on December 30, 2016.

Finally, the FFIEC and the agencies will offer periodic banker training by teleconference and webinar to explain upcoming reporting changes and provide guidance on Call Report requirements that bankers find challenging.

The FDIC also streamlined and clarified certain regulations through the Office of Thrift Supervision (OTS) rule integration process. Under Section 316(b) of the Dodd-Frank Act, rules transferred from the former OTS to the FDIC and other successor agencies remain in effect “until modified, terminated, set aside, or superseded in accordance with applicable law’’ by the relevant successor agency, by a court of competent jurisdiction, or by operation of law. When the FDIC republished the transferred OTS regulations as new FDIC regulations applicable to state savings associations, the FDIC stated in the Federal Register notice that its staff would evaluate the transferred OTS rules and might later recommend incorporating the transferred OTS regulations into other FDIC rules, amending them, or rescinding them. This process began in 2013 and continues, involving publication in the Federal Register of a series of NPRs and final rules. In 2016, the FDIC issued an NPR to remove one transferred OTS rule, Minimum Security Procedures, and to make technical amendments to related FDIC rules for applicability to state savings associations. The FDIC removed a former OTS rule, Frequency of Safety and Soundness Examination, because it became unnecessary after FDIC rules were amended to bring insured state savings associations within its scope. Finally, in November 2016, the FDIC’s Board approved the issuance of an NPR that proposes the removal of another OTS rule, Consumer Protection in Sales of Insurance, and corresponding revisions to the FDIC’s rule at 12 CFR Part 343 to ensure that Part 343 applies to FDIC- supervised state banks and savings associations.